One of the mistakes technologists often make is to present and think about their products as evangelical movements - for example, are you Mac or Windows? Technology is a tool for the job, and at the end of a back-slapping day, we set out to bring the meeting back down to earth - as finance people often do - by getting the technologists to focus on the discipline of cost/benefit analysis.
At last week’s Business Cloud Summit, three experts were asked to help analyse the potential returns on investment and compare total ownership costs with on premise computing models : IDC European research manager Spencer Izard, Mac Scott from Xantus, now a KPMG subsidiary, and Tim McGinn from Westbrook International.
Just before his consultancy was taken over by KPMG in October, Xantus published report called ‘A Clearer Horizon?’ that drew on interviews with 70-odd chief information officers about their views on Cloud Computing. Over a quarter (27%) said they were spending 30-40% of their budgets on Cloud-based solutionos. Even more impressively, three-quarters (76%) thought a felt a return on investment of up to 25% “was realistic”.
At an earlier session News International CIO Paul Cheesbrough claimed cost was only the third place consideration for migrating to the Cloud, behind implementation speed/agility and innovation. Nobody contradicted him. In the case study that followed, Richard Wallace from security group G4S (formed by the merger of Group 4 and Securicor) said that moving a legacy cash tracking/management application from a managed service took out a third of the running costs overnight.
According to the Xantus study, the financial benefits of the Cloud come from:
- No upfront capial expenditure, especially for “public” Cloud applications that are trusted to an external host
- Faster time to value, which lessens overall operating costs.
- Faster realisation of beneftis from new projects.
- Lower maintenance and upgrade costs
- Higher utilisation of existing assets.
On the negative side, the financial drawbacks of going with the Cloud come from:
- Increased operating expenditure from subscription costs and other overheads, based on user numbers, transaction volumes and add-on Cloud services used
- Increased management burden and associated costs
- Integration, customisation and infrastructure costs if multiple Cloud vendors or a hybrid on-premise and Cloud applications are used
- Stringent overuse or overdraft costs for exceeding contracted service quantities.
- Potential costs associated from switching service providers
- Potentially extra security and compliance costs.
Spencer Izard from IDC emphasised that the IT community tended towards the “capex good, opex bad” view:
From his experience in business, Izard said that the managed services approach often meant that managers responsible for dealing with suppliers spent so much time attending to the contract and service levels that they might as well have kept the facilities in house. Assessing the full business case for corporate users meant getting a very clear idea of the end-user community and working out what they needed. It was more a case of ordering the right selections from the supplier’s menu to fit their needs rather than paying for the “all you can eat” licensing model of on-premise software vendors, he said.
But for smaller businesses, the Cloud business case often boiled down to getting out their credit card to get their hands on proven, functional business software quickly. Scott noted:
Tim McGinn from Westbrook International agreed, and cited numerous examples from companies and charities that had implemented FinancialForce.com and reaped a measurable financial benefit very rapidly.
But Excel can’t be dismissed that lightly. The panellists agreed that when it comes to presenting a business case for the Cloud, it’s worth identifying the different components of the arrangement (hardware, software, maintenance, speed to value and opportunity cost) and projecting the contribution of each to the expected return on investment. The Cloud is shortening the lifecycle of software applications.
As McGinn put it, even accountants are thinking these days about changing their software more frequently than their best suit. And rather than making a down payment and effectively taking out a long-term mortgage for business software, the rental model offered agility and flexibility as well as cost savings, the panellists agreed.
Technology as well as finance managers sometimes feel threatened by the arrival of business models that give them less direct control, but for both communities, the Cloud presents an opportunity to look at computing the way it should be - as a strategic resource that in the right circumstances can be harnessed to their advantage.
